What Does Risk And Return Mean At The Average Investor? Essay

1138 Words Oct 14th, 2016 5 Pages
What does risk and return mean to the average investor? In order to answer this question, investors must first look to themselves to determine the correct steps to take. One cannot call him or herself an investor without first measuring their risk tolerance as well as risk capacity. Risk tolerance represents how much a client is willing to withstand swings in the value of held assets as well as changes in general market conditions. One of the most common ways of measuring one’s risk tolerance is by taking reliable questionnaires and reviewing historical returns in order to better understand what kind of downturns one is able to stomach for different asset classes. Risk capacity is the investor’s ability to take on risk and what he or she must do in order to achieve certain goals. This is affected by concrete factors such as time horizons and income. The market has seen numerous upward and downward swings in returns. Investor behavior is directly affected by these changes and understanding the effects of investor behavior is critical. It is important to note that investors are not unequivocally risk averse, however, they are unequivocally loss averse. In other words, when a loss is guaranteed, a typical investor will avoid that investment. The very idea of loss frightens the general public, making them easily influenced by their fellow peers. This is known as the herd mentality and is a strong behavior pattern among investors. General market conditions are affected by various…

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